Trade in Value Added, Jobs and Investment Nadim Ahmad (OECD)

47 Pages·2012·1.82 MB·English

Trade in Value Added, Jobs and Investment

Nadim Ahmad (OECD)

Jennifer Ribarsky (OECD)

Paper Prepared for the IARIW 33rd General Conference

Rotterdam, the Netherlands, August 24-30, 2014

Session 4C

Time: Tuesday, August 26, Afternoon
Abstract
Trade in Value Added, Jobs and Investment
Supply Use Tables in 21st Century Production

Nadim Ahmad and Jennifer Ribarsky, OECD

The increasing international fragmentation of production that has occurred in recent decades
driven by technological progress, cost, access to resources and markets, trade policy reforms, and
indeed emerging economies, has challenged our conventional wisdom on how we look at and
interpret trade. Traditional measures of trade, record gross flows of goods and services each and
every time they cross borders leading to what many describe as a ‘multiple’ counting of trade,
which may lead to misguided policy measures. To respond to this challenge a number of
initiatives have been launched in recent years that attempt to measure, or perhaps more accurately
‘estimate’, what has become known as ‘trade in value-added’. These have all helped to shed light
on the importance of accounting for global value chains and have helped raise awareness of a
growing need to mainstream the production of these estimates within the international statistics
system. Responding to these challenges on 15 March 2012 the OECD and WTO undertook to
collaborate on the development of estimates of trade in value-added (TiVA), resulting in a first
release of a preliminary database on 16 January 2013 and a subsequent update in May 2013. This
paper describes some of the key results of that work, and the methodology used. It also describes
the detailed assumptions behind the methodology to necessarily deal with the treatment of data,
and also the initiatives launched to improve the quality of those assumptions and the underlying
data. The paper also describes extensions of the work to consider ‘trade in jobs’, and, proposes a
framework to develop Extended national Supply Use tables that capture flows of primary/property
income, so providing a mechanism to analyse the links between investment and global value
chains. While TiVA estimates have been able to shed important light on our understanding of
international trade and its relation to activity and competitiveness, in particular the importance of
recognising the importance of imports to exports, and, so, the hitherto hidden costs of
protectionism as well as the benefits of trade liberalisation, particularly in services, they do not
reveal the full picture. With significant shares of exports being driven by foreign affiliates, TiVA
estimates have also revealed the importance of going beyond just value-added towards income, in
order to capture flows outside of conventional international trade statistics, such as the repatriation
of profits related to the use of non-produced knowledge based assets (e.g. brands) and, indeed, the
repatriation of profits related to the use of produced knowledge based assets (e.g. software) that
are (often incorrectly) not recorded as receipts from exports of services.
Contents
Supply Use Tables in 21st Century Production 1
INTRODUCTION 3
WHAT IS TRADE IN VALUE-ADDED? 4
MOTIVATION—HOW CAN MEASURES OF TRADE IN VALUE-ADDED INFORM POLICY
MAKING? 5
EVIDENCE FROM THE OECD-WTO DATABASE 7
International 'Fragmentation of Production' has increased rapidly in the last two decades 8
...for example in Factory Europe and Factory Asia… 8
...and has changed the pattern of trade - who trades with who? 9
TiVA reveals more trade with the United States but also more North-South trade… 9
Global rankings change too 10
Competitiveness increasingly depends on access to imports 10
And significant shares of intermediate imports are used to produce exports 11
Services matter 12
ESTIMATING TRADE IN VALUE-ADDED 14
Creating a multiregional input output table 14
Bilateral trade in goods and services and IO balancing 17
GOING FORWARD – IMRPOVING THE QUALITY OF THE ICIO 21
Taking account of Heterogeneity in TiVA 21
Improving country coverage 27
GOING BEYOND TRADE IN VALUE ADDED 30
Trade in jobs 30
Accounting for FDI in TiVA 31
SUPPLY USE TABLES FOR 21ST CENTURY PRODUCTION 37
Supply Table 38
Use Table 38
MAINSTREAMING ICIO AND TIVA 39
ANNEX A 41
National Data Requirements: Ideal data set for current TiVA requirements 41
National Data Requirements: Minimum data set for current TiVA requirements 43
ANNEX B 44
Trade in CO2 (and other emissions) 44
Incorporating capital flows 44
Distribution sectors and trade 44

2
MEASURING TRADE IN VALUE-ADDED AND BEYOND
INTRODUCTION
Global value chains (GVCs) have become a dominant feature of today’s global economy. This
growing process of international fragmentation of production, driven by technological progress, cost,
access to resources and markets, and trade policy reforms, has challenged our conventional wisdom on
how we look at and interpret trade and, in particular, the policies that we develop around it. Indeed, taken
by themselves, traditional measures of trade, which record gross flows of goods and services each and
every time they cross borders, may lead to misguided decisions being taken.
In practice, two main approaches (micro and macro) have been used to shed light on this issue.
The former is perhaps best characterized by the well-known Apple iPod example (Dedrick, Kraemer, and
Linden 2010), which showed that of the $144 factory-gate price of an iPod dispatched from China, less
than 10 percent represented Chinese value added, with the bulk of the components (about $100) being
imported from Japan and much of the rest coming from the United States and Korea.
But this stylized approach can generally only be conducted for specific products and, even then,
only reveals part of the story related to who benefits from trade and how global value chains work, as it is
typically unable to reveal how the intermediate parts are created. For example the message would be
significantly different if, for sake of argument, the imported parts from Japan used to make the iPod
required significant Chinese content. To deal with the bigger picture and also to capture all of the upstream
effects, a number of studies have adopted a macro approach, based on the construction of intercountry or
world input-output tables (Hummels et al. 2001; Daudin, Rifflart, and Schweisguth 2009;; Johnson and
Noguera 2012; Koopman et al. 2011). And a number of pioneering initiatives, such as those of the Global
Trade Analysis Project (GTAP), collaborative efforts between the World Trade Organization (WTO) and
the Institute of Developing Economies—Japan External Trade Organization (IDE-JETRO), and the World
Input-Output Database (WIOD), have helped accelerate improvements in the underlying statistics used to
construct the results.
But these studies and initiatives have generally been one-off in nature and often require the use of
nonofficial statistical data. What has been lacking thus far has been a systematic attempt to mainstream the
development of statistics in this area. In response to this need, on 15 March 2012, the OECD and WTO
joined forces to develop a database of Trade in Value-Added (TiVA) indicators and to mainstream their
production within the international statistics system. The first preliminary results from this intiative were
released on 16 January 2013, with a further update released in May 2013. Some highlights from this
release are presented below. The next release, is scheduled for November 2014, with subsequent releases
occurring every year thereafter, reflecting the mainstreaming of the TiVA database within the OECD and
WTO core work programmes. These work programmes also envisage, as described below, on-going
improvements in the quality of the estimates produced under the ‘trade in value-added’ umbrella, both at
the national level, particularly through motivating capacity building programmes in countries where
supply-use or input-output tables are not currentlty available, and the international level, through broader
collaborative efforts to improve, for example, bilateral trade statistics.
Ultimately this paper acts, in some ways, as a clarion call that the world is increasingly
interconnected and that conventional approaches used to understand how economies work can no longer
rely solely on national statistics.
Increasingly, in order to understand how economies work, and how to target and create industrial
policies focusing on competitiveness it is necessary to see the whole. National statistics build pictures
based on interrelationships between producers and consumers and the rest of the world. But these
relationships, particularly those with the rest of the world, have become increasingly more complex, and,
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as such, there is an increasing need to consider global production within a global accounting framework.
This implies a departure from the traditional role of international organizations as compilers of
internationally comparable national statistics, such as national input-output or supply-use tables. Instead, it
requires that they bring together these national tables to create a global table.
But the emergence of global value chains also raises, arguably profound, questions about the way
national statistics are currently compiled. In the same way that international organisations increasingly
need to think ‘national’ in the way they present and compile their statistics, where ‘national’ reflects the
single economic territorty comprising the 'world' or large parts of it, national statistics institutions need to
think global. In other words, in the construction of national statistics greater emphasis is needed on the role
of the Rest of the World, both as a source of demand and supplier for demand but also with regards to the
role of multinationals. This requires a rethink of the way that firms are currently aggregated within
statistical information systems to move beyond the classic aggregation based almost exclusively on
industrial classification systems towards more meaningful aggregations that better reflect today’s 'global
factory'. Such considerations are also essential not only to better understand the way that global production
is today organised but also to better understand how investment drives global value chains, and in
particular how that very same investment can lead to difficulties in interpreting trade flows as well as GDP.
This paper is an attempt to respond to these developments and growing needs. It begins by
describing the policy drivers and needs that led to the TiVA initiative, as well as the underlying
methodology and assumptions used to estimate TiVA, before assessing the implications for statistics
offices, data collection, and national supply-use tables in particular. It ends by describing a proposal for
Extended Supply Use tables that could form the basis of a fully integrated international economic
accounting system.
WHAT IS TRADE IN VALUE-ADDED?
The “Trade in Value-Added” initiative addresses the double counting implicit in current gross
flows of trade. Instead, it measures flows related to the value that is added (labor compensation, other taxes
on production and operating surplus, or profits) by a country in the production of any good or service that
is exported (Figure 1).
Figure 1 Exports: Gross and Value-Added Flows

The simple example, shown in Figure 1 above, illustrates this. Country A exports $100 of goods,
produced entirely within A, to country B, which further processes them before exporting them to C, where
they are consumed. B adds value of $10 to the goods and so exports $110 to C. Conventional measures of
trade show total global exports and imports of $210, but only $110 of value-added has been generated in
their production. Conventional measures also show that C has a trade deficit of $110 with B, and no trade
at all with A, despite the fact that A is the chief beneficiary of C’s consumption.
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If instead we track flows in value-added, one can recalculate C’s trade deficit with B on the basis
of the value-added it “purchases” from B as final demand, which reduces its deficit on this basis to $10,
and apply the same approach to A’s value-added to show C running a deficit of $100 with A. Note that
C’s overall trade deficit with the world remains at $110. All that has changed is its bilateral positions.
This simple illustration reveals how output in one country can be affected by consumers in
another, and by how much. (An example of this is C’s consumers driving A's output). However, it can also
reveal many other important insights into global value-chains. For example, it shows that B’s exports
depend significantly on intermediate imports from A, and so reveals that protectionist measures on imports
from A could harm its own exporters and hence competitiveness. Indeed, by providing information at the
level of specific industries, it is possible to provide insights in other areas too, such as the contribution of
the service sector to international trade.
MOTIVATION—HOW CAN MEASURES OF TRADE IN VALUE-ADDED INFORM POLICY
MAKING?
Even though the literature on trade in value-added is quite technical, it has attracted a lot of
attention from policymakers. What initially seemed a concern for trade statisticians is now understood as a
key issue for the policy debate. For example, Pascal Lamy, the Director-General of the World Trade
Organization (WTO), noted that “the statistical bias created by attributing commercial value to the last
country of origin perverts the true economic dimension of the bilateral trade imbalances. This affects the
political debate, and leads to misguided perceptions” (Lamy 2011). Recently, the French Senate devoted a
special seminar to the related statistical and policy issues (WTO and Sénat 2011). There are a number of
areas where measuring trade in value-added terms brings a new perspective and is likely to have an impact
on policies. Seven key areas are described below:
1) Trade, growth, and competitiveness. A better understanding of how much domestic value-
added is generated by the export of a good or service in a country is crucial for development
strategies and industrial policies. Some countries have capitalized on global value chains by
developing comparative advantages in specific parts of the value chain. For example, in China,
many of its exports involve assembly work, where the foreign content is high. Access to efficient
imports therefore matters as much in a world of international fragmentation as access to markets.
Conventional gross trade statistics, however, are not able to reveal the foreign content of exports,
and so there is a risk that policies to protect industries where gross statistics reveal a comparative
advantage may decrease the competitiveness of those very same domestic industries. Because of
this, mercantilist-style “beggar thy neighbor” strategies can turn out to be “beggar thyself”
miscalculations.
2) Domestic value-added in imports. Domestic value-added is found not only in exports but also
in imports: Goods and services produced in one domestic industry are intermediates shipped
abroad whose value comes back to the domestic economy embodied in the imports of other, and
often the same, industries. As a consequence, tariffs, nontariff barriers, and trade measures—such
as antidumping rights—can also affect the competitiveness of domestic upstream producers (as
well as the competitiveness of downstream producers, as mentioned above), in addition to foreign
producers. For example, a study on the European shoe industry undertaken by the Swedish
National Board of Trade highlights that shoes “manufactured in Asia” incorporate between 50 and
80 percent of European Union (EU) value-added. In 2006, antidumping rights were introduced by
the European Commission on shoes imported from China and Vietnam. An analysis in value-
added terms would have revealed that EU value-added was in fact subject to the antidumping
rights (Isakson and Verrips 2012).
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3) Improving competitiveness in upstream domestic industries can boost exports. Looking at
trade from a value-added perspective is also a way to better reveal how upstream domestic
industries contribute to exports, even if those same industries have little direct international
exposure. Gross trade statistics, for example, reveal that less than one-quarter of total global trade
is in services. But in value-added terms the share is significantly higher. Goods industries require
significant intermediate inputs of services, both from foreign and also domestic suppliers.
Looking at trade in value-added terms therefore can reveal that policies to encourage services
trade liberalization and more foreign direct investment (and so policies designed to improve
access to more efficient services) can improve the export competitiveness of goods industries.
4) Global imbalances. Accounting for trade in value-added (specifically accounting for trade in
intermediate parts and components), and taking into account “trade in tasks,” does not change the
overall trade balance of a country with the rest of the world—rather, it redistributes the surpluses
and deficits across partner countries. When bilateral trade balances are measured in gross terms,
the deficit with final goods producers (or the surplus of exporters of final products) is exaggerated
because it incorporates the value of foreign inputs. The underlying imbalance is in fact with the
countries who supplied inputs to the final producer. As pressure for rebalancing increases in the
context of persistent deficits, there is a risk of protectionist responses that target countries at the
end of global value chains on the basis of an inaccurate perception of the origin of trade
imbalances. As shown below, the Results from the OECD-WTO database point to significant
changes.
5) The impact of macroeconomic shocks. The 2008–2009 financial crisis was characterized by a
synchronized trade collapse in all economies. Authors have discussed the role of global supply
chains in the transmission of what was initially a shock on demand in markets affected by a credit
shortage. In particular, the literature has emphasized the “bullwhip effect” of global value chains
(Escaith, Lindenberg, and Miroudot 2010; Lee, Padmanabhan, and Whang 1997). When there is a
sudden drop in demand, firms delay orders and run down inventories, with the consequence that
the fall in demand is amplified along the supply chain and can translate into a standstill for
companies located upstream. A better understanding of value-added trade flows would provide
tools for policymakers to anticipate the impact of macroeconomic shocks and adopt the right
policy responses. Any analysis of the impact of trade on short-term demand is likely to be biased
when looking only at gross trade flows. This was recently demonstrated in the aftermath of the
natural disaster that hit Japan in March 2011. 1
6) Trade and employment. Several studies on the impact of trade liberalization on labor markets
try to estimate the “job content” of trade. Such analysis is only relevant if one looks at the value-
added of trade. What the value-added figures can tell us is where exactly jobs are created.
Decomposing the value of imports into the contribution of each economy (including the domestic
one) can give an idea of who benefits from trade. The EU shoe industry example given above can
be interpreted in terms of jobs. Traditional thinking in gross terms would regard imports of shoes
manufactured in China and Vietnam by EU shoe retailers as EU jobs lost and transferred to these
countries. But in value-added terms, one would have to account for the EU value-added, and
while workers may have indeed lost their jobs in the EU at the assembly stage, value-added-based
measures would have highlighted the important contribution made by those working in the
research, development, design, and marketing activities that exist because of trade (and the fact
that this fragmented production process keeps costs low and EU companies competitive). When
comparative advantages apply to “tasks” rather than to “final products,” the skill composition of
labor embedded in the domestic content of exports reflects the relative development level of

1. See an application of international IO in Escaith et al. (2011).
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participating countries. Industrialized countries tend to specialize in high-skilled tasks, which are
better paid and capture a larger share of the total value added. A WTO and IDE-JETRO study on
global value chains in East Asia shows that China specializes in low-skilled types of jobs. Japan,
on the other hand, has been focusing on export activities intensive in medium- and high-skilled
labor while importing goods produced by low-skilled workers. The study also shows that in 2006
the Republic of Korea was adopting a middle-ground position but was also moving closer to the
pattern found in Japan (WTO and IDE-JETRO 2011).
7) Trade and the environment. Another area where the measurement of trade flows in value-added
terms would support policymaking is in the assessment of the environmental impact of trade. For
example, concerns over greenhouse gas emissions and their potential role in climate change have
triggered research on how trade openness affects CO2 emissions. The unbundling of production
and consumption and the international fragmentation of production require a value-added view of
trade to understand where imported goods are produced (and hence where CO2 is produced as a
consequence of trade). Various OECD studies note that the relocation of industrial activities can
have a significant impact on differences in consumption-based and production-based measures of
CO2 emissions (Ahmad and Wyckoff 2003; Nakano et al. 2009).
EVIDENCE FROM THE OECD-WTO DATABASE
Currently, the database is based on a global input-output table that brings together national input-
output tables for 57 economies, combined with bilateral trade data on goods and services broken down into 37
industries (see Table 1 below), with data currently provided at an aggregated level of 18 industries . The
following provides an overview of the key messages provided by the data.2
Table 1: TiVA database: Geographical Coverage
Australia Hungary Poland Brunei Darussalam Philippines
Austria Iceland Portugal Bulgaria Romania
Belgium Ireland Slovak Republic Cambodia Russian Federation
Canada Israel Slovenia China Saudi Arabia
Chile Italy Spain India Singapore
Czech Republic Japan Sweden Hong Kong, China South Africa
Denmark Korea Switzerland India Thailand
Estonia Luxembourg Turkey Indonesia Viet Nam
Finland Mexico United Kingdom Latvia Rest of the World
France Netherlands United States Lithuania
Germany New Zealand Argentina Malaysia
Greece Norway Brazil Malta

2 For more information on the database, see OECD (2013).

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International 'Fragmentation of Production' has increased rapidly in the last two decades
Countries with relatively open and liberal trade regimes and high degrees of foreign
investment will be typically expected to have higher foreign content in their exports. But a number of other
factors impact on the extent of a country's integration into, and specialisation within, global value chains
(GVCs). Larger economies, those with significant mineral resources, and those that are far from foreign
markets and suppliers tend to have lower foreign content in their exports than smaller economies, as do
those with high specialisation in services. This helps to explain the relative positions of countries shown in
Figure 2 below which points to increasing foreign content in the exports of most countries in the last two
decades and, so, increasing integration within GVCs.
...for example in Factory Europe and Factory Asia…
In Europe, the foreign content of exports in former transition economies, such as the Czech Republic,
Hungary and Slovakia, stood at around 40% in 2009, significantly up from 1995, as these countries began to
specialise in stages of the electronic and automotive value chains revolving in large part around Germany where
the foreign content of exports rose from one-fifth in 1995 to nearly one-third in 2009.
Figure 2: Foreign content of Gross Exports, %
60%
2009 1995
50%
40%
30%
20%
10%
0%
XPKLNRNELSTMLUDLANMNETNTRKTRXGELUAAUCDRPANLLRFRNNSGNAASU
ULGSVSRIWTOKUHZCHPYMLMNVSITLLNEBHTVSHKIFWSSEHCRPGBNDUASIEMKHHCOPEDVLRFORRGNIUTSETIACHCZNBGAZONPJDIUARARBSURBURAS
SOURCE: OECD-WTO Trade in Value-Added (TiVA) Database
Similar patterns have emerged in Asia, reflecting in particular China's emergence and rapid
integration into GVCs since its accession to the WTO in 2001. One-third of all Chinese exports in 2009
reflected foreign content, significantly up from 12% in 1995, reflecting in large part China's specialisation
in the assembly and processing of electronic components. Significant changes were seen in other parts of
Factory Asia too, such as Korea (41% in 2009) and Japan (15%), where the foreign content of exports
doubled over the period. Data also show that the domestic value-added content of China’s exports rose
between 2005 and 2009; potentially indicating a move up the value chain, with other low labour cost
countries such as Vietnam and Cambodia moving into processing. The database also shows that in most
countries, the foreign content of exports fell in 2009 compared to 2008, indicating that the more
internationally fragmented the chain the more vulnerable production was to the synchronised slowdown in
trade that occurred at the height of the crisis.

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...and has changed the pattern of trade - who trades with who?
Bilateral trade balance positions can change significantly when measured in value-added terms,
even though the total trade balance is unaffected. China’s bilateral trade surplus with the United States was
over one-third smaller in value-added terms in 2009, compared to gross based measures for example. This
partly reflects the higher share of U.S. value-added imports in Chinese final demand but also the fact that a
significant share (one-third) of China’s exports reflect foreign content—the “Factory Asia” phenomenon.
The data illustrate that significant exports of value-added from Korea and Japan pass through China on
their way to final consumers, resulting in significantly smaller Chinese trade deficits with these countries
but also typically higher Japanese and Korean trade surpluses with other countries. Similarly, the database
shows that Korea’s significant trade deficit with Japan in gross terms almost disappears when measured in
value-added terms.
Increasing fragmentation of production, driven by trade in intermediates, means that gross
measures of trade may distort our interpretation of trade. Typically, gross trade statistics overstate the
importance of neighbouring economies, and, so, understate the importance of distant economies driving
demand at the end of the chain. In gross terms, 28% of Korea's exports in 2009 went to China (Figure 3)
but in value-added terms only 14% of Korea's exports were destined for Chinese final consumers; a
difference that in large part reflects China's processing of Korean intermediates for export to third countries
like the US. Similar patterns exist for many other economies upstream of China in 2009, such as Malaysia
and Thailand, while in Indonesia and Vietnam, which are further downstream, value-added and gross
shares were relatively similar, partly reflecting their emergence as processors. Data also show that China
had relatively limited integration within GVCs in 1995.
Figure 3: Exports to China: Gross and Value-added terms, % of total
40
35 Value-Added Gross
30
25
20
15
10
5
0
2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995 2009 1995
Chinese Japan Korea Malaysia Thailand Hong Kong, Singapore Philippines India Indonesia Viet Nam Cambodia Brunei
Taipei China Darussalam
SOURCE: OECD-WTO Trade in Value-Added (TiVA) Database
Value-added trade measures also reveal the growing importance of China as a final destination market.
For example, Japan and Korea's value-added exports in 2009 destined for Chinese consumers were two to three
times their rate in 1995. The partial corollary of this has been a decline in the importance of Japan as a final
destination market, partly reflecting Japan's sluggish nominal economic growth over the 2000s. In value-added
terms, 6.2% of the United States' exports in 2009 were destined for China, just shy of the 6.8% exported to
Japan. The corresponding figures for 1995 were 2.3% and 12.7% respectively.
TiVA reveals more trade with the United States but also more North-South trade…
In value-added terms the importance of the United States as a source of imports and also as a
destination for exports is higher than gross measures (Figure 4). Export shares, for example, were lower in
value-added terms in only five countries in 2009: Vietnam, Israel, Cambodia, Canada and Mexico, partly
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